FINRA Series 7 — All Questions

Which margin agreement permits the broker-dealer to pledge a customer's securities as collateral for its own bank loan?

• a.The hypothecation agreement✓
• b.The credit agreement
• c.The limited trading authorization
• d.The loan consent agreement

Hypothecation lets the firm pledge margined securities as collateral. The credit agreement sets out interest charges and terms of the debit balance. The loan consent agreement allows the firm to lend the customer's securities to short sellers, and a limited trading authorization lets another person place orders.Margin account agreements

Why does a member firm ask a customer for a trusted contact person?

• a.To receive trade confirmations in place of the customer
• b.To reach someone if it suspects exploitation or loses contact✓
• c.To place orders when the customer cannot be reached
• d.To guarantee the customer's margin debit if the customer defaults

A trusted contact lets the firm raise concerns about the customer's well-being or suspected exploitation and confirm the customer's contact details. The trusted contact has no authority to trade, does not guarantee debts, and does not take over the customer's confirmations.FINRA Rule 4512

A member firm reasonably believes that a 70-year-old customer is being financially exploited and places a temporary hold on a disbursement. How long may the initial hold last?

• a.15 business days from the date it is placed✓
• b.30 calendar days from the date placed
• c.60 calendar days after the hold is first placed
• d.10 business days, counted from the date it is placed

Rule 2165 lets a member hold a disbursement for an initial 15 business days when it reasonably believes a specified adult is being exploited. Further time is possible only if the member reports the matter to a regulator or court, and the shorter and longer periods do not match the rule.FINRA Rule 2165

Under FINRA's rule on holding disbursements for suspected exploitation, who is a specified adult?

• a.A person age 65 or older, or an adult with a mental or physical impairment✓
• b.A person age 70 or older, or an adult named as a trustee on any account
• c.A person age 55 or older, or an adult living alone without family
• d.A person age 62 or older, or an adult who has retired from work

The rule protects customers age 65 or older and customers 18 or older whom the member reasonably believes cannot protect their own interests because of a mental or physical impairment. Other age thresholds and circumstances, such as living alone or being retired, do not qualify.FINRA Rule 2165

Which Regulation Best Interest obligation requires a representative to understand the risks, rewards and costs of a recommendation?

• a.The compliance obligation, which requires written policies and procedures
• b.The care obligation, which requires reasonable diligence, care and skill✓
• c.The conflict obligation, which requires identifying and mitigating conflicts
• d.The disclosure obligation, which covers material facts about the relationship

The care obligation is the part of Regulation Best Interest that calls for reasonable diligence, care and skill in understanding a recommendation and its fit for the customer. The other obligations cover what must be disclosed, how conflicts are handled, and which policies the firm must maintain.Regulation Best Interest

Regulation Best Interest applies to a recommendation made to which of these persons?

• a.A natural person using it for personal, family or household purposes✓
• b.A broker-dealer buying securities for its own trading account
• c.A natural person using it for a business trading operation
• d.A corporation using it to fund the company's own employee pension plan

Regulation Best Interest protects retail customers, who are natural persons receiving a recommendation for personal, family or household use. Entities, broker-dealers and business uses fall outside the definition.Regulation Best Interest

What is the maximum length of a Form CRS from a broker-dealer that is not also an investment adviser?

• a.Five pages
• b.Seven pages
• c.Two pages✓
• d.Four pages

A broker-dealer's relationship summary may not exceed two pages, or the electronic equivalent. A combined summary from a dual registrant may run to four pages. One page and six pages are not limits in the instructions.SEC Form CRS

Under FINRA's communications rule, what is a retail communication?

• a.A communication sent to 25 or fewer retail investors in 30 days
• b.A communication sent to more than 25 retail investors in 30 days✓
• c.A communication sent to more than 10 retail investors in any 30 days
• d.A communication sent to more than 100 retail investors in 90 days

A retail communication goes to more than 25 retail investors within any 30 calendar-day period. A communication to 25 or fewer is correspondence. The other numbers are not part of the definition.FINRA Rule 2210

Which of these requires approval by a registered principal before its first use?

• a.A communication sent only to a bank or insurance company
• b.A brochure promoting the firm's mutual funds to the general public✓
• c.An internal training memo for registered representatives
• d.An email answering one customer's question about an account

A retail communication such as a public brochure must be approved by a principal before use. One-to-one answers are correspondence and are reviewed under the firm's procedures. Communications to institutional investors do not need pre-use approval, and an internal memo is not a communication to the public.FINRA Rule 2210

Which statement is prohibited in a retail communication?

• a.Actual historical performance with the required disclosures
• b.A projection that a fund will return 10% a year✓
• c.A fair comparison of the firm's fees with a competitor's
• d.A statement of a fund's stated investment objective

A retail communication may not predict or project investment performance, other than a few permitted items such as hypothetical analyses or price targets. A fund's objective, historical performance with required disclosures and a balanced comparison of fees are all allowed.FINRA Rule 2210

A customer account had no activity during a calendar quarter. At a minimum, how often must the firm send account statements?

• a.Once a year, after the end of the customer's tax year
• b.At least once each month, whether or not there was activity
• c.Only when the customer requests a statement in writing
• d.At least once in each calendar quarter, even with no activity✓

Rule 2231 requires a statement at least once each calendar quarter, so an inactive account is still covered. Annual or on-request statements fall short of that minimum.FINRA Rule 2231

How long must a firm keep a record of written customer complaints?

• a.At least two years
• b.Until the account is closed
• c.At least four years✓
• d.At least six years

FINRA Rule 4513 requires a member to keep complaint records for at least four years. Two years is too short, and the rule does not tie the period to account closing.FINRA Rule 4513

Under FINRA's gift rule, what is the most a firm or representative may give one person in a year in connection with the recipient's employer's business?

• a.$300 per person per year✓
• b.$500 per person each year
• c.$100 per person in any year
• d.$250 per person a year

Rule 3220 caps gifts at $300 per person per year when they relate to the recipient's employer's business (raised from $100 effective March 30, 2026). The $100 figure is the pre-2026 limit and no longer applies, $250 is not a figure in the rule, and $500 is above the cap, so a gift of that size would violate it.FINRA Rule 3220(a)

At what times may a registered representative make telemarketing calls to a residence?

• a.Between 8 a.m. and 9 p.m. at the called person's home✓
• b.Between 9 a.m. and 5 p.m. at the called person's own home
• c.Between 7 a.m. and 10 p.m. at the called person's home
• d.Between 8 a.m. and 9 p.m. at the firm's home office location

Telemarketing calls are limited to 8 a.m. to 9 p.m. local time at the called person's location. The caller's time zone is not the test, and the other windows are not those in the rule.FINRA Rule 3230

A customer tells a representative to buy 500 shares of ABC whenever and at whatever price the representative chooses. How long may this time and price discretion continue without a written authorization?

• a.Until the customer's next account statement is sent
• b.For one year, with annual renewal needed
• c.Until the end of the business day it was given✓
• d.For 30 days unless the customer revokes it

Discretion limited to time and price is allowed without written authorization only until the end of that business day. Longer discretionary authority requires a written power of attorney and principal approval.FINRA Rule 3260

What is the maximum SIPC protection for one customer's securities and cash?

• a.$500,000, including no more than $250,000 of cash✓
• b.$1,000,000, including no more than $250,000 of cash
• c.$250,000, including no more than $100,000 held as cash
• d.$500,000, including at most $100,000 of cash

SIPC covers up to $500,000 per customer, of which up to $250,000 may be cash. It protects against a firm's failure and missing assets, not against a fall in the value of securities.SIPC

A customer receives a distribution from an IRA and wants to roll it over to another IRA. How long does the customer have to complete the rollover?

• a.30 days from the day the distribution is received
• b.120 days from the day the distribution is received
• c.90 days from the day the distribution is received
• d.60 days from the day the IRA distribution is received✓

An IRA distribution may be rolled over within 60 days of receipt to avoid tax. Missing the 60 days makes the distribution taxable, and the other figures are not the rule.Internal Revenue Code Section 408

A 45-year-old takes a $20,000 withdrawal from a traditional IRA and meets no exception. How is it taxed?

• a.As ordinary income only, since IRAs carry no penalty
• b.As ordinary income, plus a 20% additional federal tax
• c.As ordinary income, plus a 10% additional tax✓
• d.As long-term capital gains, plus a 10% additional tax

Traditional IRA withdrawals are ordinary income, and a withdrawal before age 59 and a half without an exception adds a 10% additional tax. Capital gains rates do not apply, and the additional tax is 10%, not 20%.Internal Revenue Code Section 72

Which items must a broker-dealer's customer identification program collect for an individual opening an account?

• a.Name, date of birth, address and income
• b.Name, address, occupation, employer and net worth
• c.Name, date of birth, address and an ID number✓
• d.Name, employer, address and a signature card on file

The customer identification program rule requires a name, date of birth, residential address and an identification number such as a taxpayer ID. The other items may be collected for other reasons but are not required by the rule.31 CFR 1023.220

Before effecting a short sale for a customer, what must the broker-dealer have?

• a.A guarantee from the issuer that the shares may be sold short
• b.A written power of attorney from the customer for the short sale
• c.Reasonable grounds to believe the shares can be borrowed for delivery✓
• d.Confirmation that the sale is made on a plus tick or zero-plus tick

Regulation SHO requires a locate: the firm must borrow the security, arrange to borrow it, or have reasonable grounds to believe it can be borrowed in time for delivery. A power of attorney is needed only for discretionary trading, no plus tick is required on every short sale, and issuers do not guarantee short sales.Regulation SHO Rule 203

What triggers the alternative uptick rule for a single stock?

• a.A price drop of at least 20% from the prior day's open
• b.A price drop of at least 5% from the prior day's closing price
• c.A price drop of at least 10% from the prior day's close✓
• d.A price drop of at least 15% from the prior close

Rule 201 applies when a stock trades down 10% or more from the prior close, and then short sales are limited to prices above the national best bid for the rest of that day and the next. The other percentages are not the trigger.Regulation SHO Rule 201

The S&P 500 falls 7% from the prior day's close at 1:30 p.m. What happens?

• a.Trading halts across all markets until the next open
• b.Trading halts across the markets for 5 minutes
• c.Trading halts across the markets for 15 minutes✓
• d.Trading halts only in stocks down at least 7%

A 7% fall before 3:25 p.m. is a Level 1 decline and halts trading in all stocks for 15 minutes. The rest-of-day halt applies at 20%, the halt is market-wide rather than stock by stock, and 5 minutes is not a circuit breaker period.SEC and exchange market-wide circuit breakers

At what decline in the S&P 500 does trading halt for the rest of the day?

• a.10% from the prior day's close, if it occurs at any time
• b.13% from the prior day's close, if it occurs before 3:25 p.m.
• c.20% from the prior day's close, at any time of day✓
• d.7% from the prior day's close, if it occurs after 3:25 p.m.

A 20% decline ends trading for the day. A 7% or 13% decline halts trading for 15 minutes before 3:25 p.m. and does not halt it after that time, and 10% is not a market-wide level.SEC and exchange market-wide circuit breakers

When must a participant close out a fail to deliver in a threshold security?

• a.After the fail has persisted for 21 straight settlement days
• b.After the fail has persisted for 13 consecutive settlement days✓
• c.After the fail has persisted for 5 consecutive settlement days
• d.After the fail has persisted for 35 consecutive calendar days

A threshold security with a fail position that persists for 13 consecutive settlement days must be closed out by purchasing shares of like kind and quantity. Five days is part of the test for listing a threshold security, and the other periods do not match the rule.Regulation SHO Rule 203

How long must restricted stock of a reporting company be held before it can be sold under Rule 144?

• a.Six months✓
• b.One year
• c.Three months
• d.Nine months

Restricted securities of a reporting issuer have a six-month holding period under Rule 144, and one year applies to non-reporting issuers. Three months and nine months are not holding periods in the rule.SEC Rule 144

What is the three-month sales limit for an affiliate selling stock under Rule 144?

• a.The lesser of 1% of the shares outstanding or the four-week average weekly volume
• b.10% of shares outstanding or the monthly volume, whichever is greater
• c.The greater of 1% of shares outstanding or the prior week's trading volume
• d.The greater of 1% of shares outstanding or the four-week average weekly volume✓

An affiliate may sell, in any three months, the greater of 1% of the outstanding shares or the average weekly trading volume over the four weeks before the sale notice. Using the lesser, the prior week alone, or 10% departs from the rule.SEC Rule 144

When must an affiliate file Form 144 with the SEC?

• a.When selling more than 10,000 shares or $100,000 in a 12-month period
• b.When selling any restricted shares in any amount, at any time
• c.When selling over 5,000 shares or $50,000 in three months✓
• d.When selling more than 500 shares or $5,000 in a three-month period

Form 144 is required if the sale exceeds 5,000 shares or $50,000 in any three-month period. Smaller or larger thresholds, or filing on every sale, are not what the rule requires.SEC Rule 144

An individual is accredited because of net worth. What net worth is required?

• a.Over $2.5 million, excluding the primary residence
• b.Over $1 million, including the value of the primary residence
• c.Over $1 million, excluding the primary residence✓
• d.Over $500,000, excluding the primary residence

An individual qualifies on net worth above $1 million, either alone or with a spouse, not counting the home. The other figures or counting the home fall outside the definition.SEC Regulation D

How many non-accredited purchasers may buy in a Rule 506(b) offering?

• a.None, since only accredited investors may buy
• b.No more than 100 if they are residents of one state
• c.No more than 15 who meet the sophistication test
• d.No more than 35 who meet the sophistication requirement✓

A Rule 506(b) offering allows up to 35 non-accredited purchasers who are sophisticated, either alone or with a purchaser representative, and unlimited accredited investors. Allowing none describes a Rule 506(c) offering, which is limited to accredited investors, and the other limits are not in the rule.SEC Regulation D Rule 506(b)

What is the largest over-allotment option an underwriter may hold in a public offering?

• a.15% of the shares sold in the base offering✓
• b.A cap of 20% of the base offering
• c.15% of the total offering, counting the shares sold under the option itself
• d.25% of the base offering

Rule 5110 treats an over-allotment option for more than 15% of the securities offered, computed without counting the option shares, as an unreasonable term, so 15% of the base offering is the ceiling. Computing 15% on a total that already includes the option shares stretches the limit past what the rule allows, and 20% or 25% of the base offering are simply above the cap.FINRA Rule 5110(g)(9)

Securities received by an underwriter as compensation in a public offering may not be sold, transferred or hedged for how long?

• a.180 days after the offering begins✓
• b.Twelve months after the offering begins
• c.90 days after the offering price is set
• d.30 days after the offering is completed

Rule 5110(e)(1) bars sale, transfer, pledge or hedging of underwriting compensation securities for 180 days beginning on the date sales of the offering commence. Twelve months is longer than the rule requires, and a 90 day or 30 day period, whether run from pricing or from completion, is both too short and measured from the wrong date.FINRA Rule 5110(e)(1)(A)

How should a representative understand FINRA's 5% markup policy?

• a.It is a minimum markup a firm must charge on all small orders
• b.It is a guideline, and a lower charge can still be unfair✓
• c.It applies only to agency trades and not to principal trades
• d.It is a hard cap, so any charge at or below 5% is fair

The 5% policy is a guide to fair pricing, not a safe harbor or cap, and a charge below 5% can still violate FINRA's rules, depending on factors such as price and order size. It sets no minimum, and it applies to principal trades.FINRA Rule 2121

A dealer sells 400 shares to a customer at $25.00 when the prevailing market price is $24.00. What is the markup?

• a.$400, or 4.0% measured against the $25.00 sale price to the customer
• b.$1.00, the per-share difference, with no percentage needed on the confirmation
• c.$200, or about 2.1%, found by measuring from the midpoint of the two prices
• d.$400, or 4.2% of the prevailing market price✓

The markup is $1.00 per share on 400 shares, or $400, and it is expressed as a percentage of the prevailing market price of $24.00, which is about 4.2%. Using the customer's $25.00 price as the base gives 4.0%, which is the wrong base. A per-share difference is not the total dollar amount, and the rule requires both a dollar amount and a percentage. Measuring from the midpoint of the two prices has no basis in the markup calculation.FINRA Rules 2121 and 2232(c)

A customer enters a sell stop order at 48 on a stock now trading at 50. What happens when the stock trades at 48?

• a.The order becomes a market order and is executed at the next available price✓
• b.The order becomes a limit order and executes only at 48 or better
• c.The order is canceled until the stock rises above 50 again
• d.The order executes at exactly 48, whatever the next price

A sell stop becomes a market order when the stock trades at or below the stop price, so the fill may be above or below 48. It does not become a limit order, is not canceled, and carries no price guarantee.Order types

A customer enters a sell stop-limit with a stop of 48 and a limit of 47. The stock gaps down to 45. What happens?

• a.It is canceled because the stock gapped through the limit
• b.It becomes a limit order at 47 and may not fill at 45✓
• c.It executes at 48, the stop price, as a guaranteed fill
• d.It executes at 45, the best price then available to the market

Once the stop is touched, the stop-limit becomes a limit order at 47, so it can fill only at 47 or better. If the price stays at 45, it does not execute. It does not fill at 45, it cannot execute at the stop price, and it is not canceled.Order types

Which order must be executed in its entirety immediately or be canceled?

• a.All-or-none, which can stay open until the whole size trades
• b.Fill-or-kill, which is filled in full at once or it is canceled✓
• c.Immediate-or-cancel, which fills part at once and cancels the rest
• d.Good-till-canceled, which stays open until it is filled

Fill-or-kill requires the whole quantity at once or cancellation. Immediate-or-cancel fills what it can immediately and cancels the rest, all-or-none can remain open until the whole size trades, and a good-till-canceled order stays open.Order types

A stock is quoted $20.00 bid, $20.10 ask. A customer enters a market order to sell. At what price does the customer's order normally execute?

• a.$20.05, the midpoint of the quote
• b.$20.10, the ask the buyer pays
• c.$20.15, the ask plus a tick
• d.$20.00, the quoted bid price✓

A seller hitting the market normally receives the bid, and a buyer pays the ask. The midpoint is not available to a market order, and a price above the ask would not be a sale at the best bid.Quotes

What is the standard settlement cycle for most securities trades?

• a.Two business days following the trade date
• b.On the same business day as the trade date
• c.One business day following the trade date✓
• d.Three business days following the trade date

The SEC shortened the standard cycle to T+1 effective May 28, 2024. Two and three days were earlier cycles, and same-day settlement is not the standard.SEC Rule 15c6-1

Under T+1 settlement, when is a stock normally ex-dividend relative to the record date?

• a.Two business days ahead of the record date
• b.One business day after the record date
• c.On the same business day as the record date✓
• d.One business day ahead of the record date

With T+1 settlement, a buyer on the record date settles that day, so the stock normally goes ex-dividend on the record date itself. One and two days before were the prior T+2 pattern, and a day after would exclude buyers who qualify.SEC Rule 15c6-1

Within what period after approval must a customer return a signed options agreement to the member firm?

• a.5 days after the account is approved
• b.Before the first options trade
• c.30 days after the account is first approved
• d.15 days after the account is approved✓

Rule 2360 requires the signed options agreement within 15 days after the account is approved for options trading. Five days and 30 days are not the period, and the rule does not require it before the first trade.FINRA Rule 2360

When must a customer receive the Options Disclosure Document?

• a.Only if the customer asks the firm for a printed copy
• b.Within 15 days after the customer's first option trade is made
• c.When the customer's first option position expires or is exercised
• d.At or before the time the account is approved for options✓

The ODD must be delivered at or before approval of the options account. Later delivery or delivery only on request would leave the customer without the risk disclosure when the first trade is placed.FINRA Rule 2360

When do standard monthly equity options expire?

• a.On the fourth Friday of the expiration month
• b.On the third Thursday of the expiration month
• c.On the third Friday of the expiration month✓
• d.On the last business day before the month ends

Standard monthly equity options expire on the third Friday of the month. Month-end, the third Thursday and the fourth Friday are not the contract cycle date.OCC Rules

Institutions trade listed stock directly with one another through an electronic network, without a broker-dealer. Which market is this?

• a.The first market
• b.The fourth market✓
• c.The gray market
• d.The third market

Direct trading between institutions with no broker-dealer is the fourth market. The third market is listed securities traded over the counter by dealers, the first market is an exchange, and the gray market is trading in securities not yet issued.Securities Exchange Act of 1934

A firm holds a customer's order to buy 300 shares of XYZ. Before executing it, the firm buys XYZ for its own account at the same price. What is this?

• a.Permitted, if the firm pays a lower price than the customer
• b.Permitted, if the firm discloses the trade to the customer afterward
• c.A violation, since a member may not trade ahead of a held order✓
• d.Permitted, because the order was not yet entered on the exchange

Rule 5320 prohibits trading ahead of a held customer order, and disclosure, timing of entry or price improvement does not cure the conduct.FINRA Rule 5320

Which activity is permitted during the cooling-off period of a new issue?

• a.Guaranteeing a customer a full allotment of shares
• b.Sending sales literature that states the final offering price
• c.Accepting binding orders and delivering the shares sold
• d.Delivering a preliminary prospectus to interested investors✓

During the cooling-off period, firms may deliver the preliminary prospectus and gather non-binding indications of interest. Binding sales and delivery, price-bearing sales literature and allotment guarantees must wait for effectiveness.Securities Act of 1933

A buyer acquires more than 5% of a registered class of stock. When must it file the initial Schedule 13D?

• a.Within ten days of the purchase
• b.Within thirty days of the purchase
• c.Within five business days✓
• d.Within 45 days after year-end

The SEC changed the initial Schedule 13D deadline from ten days to five business days, effective in 2024. Thirty days and the year-end period are not the deadline.Securities Exchange Act of 1934 Section 13(d)

A corporate director buys 1,000 shares of her company and sells them four months later at a profit. What must she do with the profit?

• a.Return it to the issuer, since the trades fell within six months✓
• b.Keep it, provided she reports both trades on Form 4
• c.Keep it, because she held the shares longer than 30 days
• d.Pay it to the SEC, which distributes it to the company's shareholders

Section 16(b) makes insiders (directors, officers and 10% owners) give back to the issuer any profit from a purchase and sale, or sale and purchase, within six months. Holding beyond 30 days does not help, the recovery goes to the issuer rather than to the SEC or shareholders directly, and filing a report does not excuse the profit.Securities Exchange Act of 1934 Section 16(b)

A broker-dealer files a suspicious activity report after detecting facts that may require one. What is the filing deadline?

• a.10 calendar days from the initial detection of the facts
• b.60 calendar days from detection of the facts
• c.30 calendar days from initial detection of the facts✓
• d.The end of the quarter in which the facts were detected

A SAR is due no later than 30 calendar days after the firm first detects facts that may constitute a basis for filing, and longer if no suspect is identified. Shorter and longer fixed periods and quarter-end filing do not match the rule.Bank Secrecy Act and 31 CFR 1023.320

A registered representative learns that the firm has filed a SAR on a customer. What may the representative do?

• a.Warn the customer so the customer can explain the activity
• b.Tell no one outside authorized firm personnel, customer included✓
• c.Share it with another customer in a similar situation
• d.Give the customer a copy so the filing can be disputed

SARs are confidential, and disclosing a filing or its existence to the subject is a violation known as tipping off. Warning, giving a copy or sharing with another customer would reveal the report.Bank Secrecy Act and 31 CFR 1023.320

For a broker-dealer, what is the dollar amount at which a suspicious transaction must be reported on a SAR?

• a.At least $25,000 in funds or assets
• b.At least $5,000 in funds or other assets✓
• c.At least $1,000 in funds or assets
• d.At least $10,000 in funds or assets

A broker-dealer must file a SAR when a transaction involves or aggregates at least $5,000 in funds or assets and the firm suspects it falls within the listed categories. The $10,000 amount is the currency transaction reporting threshold, and the other figures are not the SAR threshold.31 CFR 1023.320